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Monday, July 30, 2012

In a recent interview at Casey Research, Jim Puplava shed
some light on the ongoing inflation / deflation debate.He takes the position that in a fiat money
system, there can be no deflation – deflation meaning as measured in prices.

This is one of the problems we have
when talking about deflation. You will often hear, for example, that
"housing prices fell by 30%" or the "stock market fell by
40%," supposedly meaning it was deflationary. But that is a specious
argument at best, because if we call the crash in real estate and the stock market
deflation, then what would the deflationists argue now that housing is starting
to turn around? What would they call the S&P going from 666 to 1,373? It's
up over 100%... is that deflation?

Let's take the popular definition
of inflation – rising prices, which is really a symptom of inflation. During
the financial crisis, there were only three months where the CPI was negative.
Prior to 2008, the last time you saw a negative CPI was in 1954, when
Eisenhower was president! So despite all the claims about deflation, all you
would have to do is look at a graph of M1 and M2 and see that the money supply
actually expanded during this period.

Under a strict gold standard, deflation was certainly
possible, for instance during the 1920-1921 recession:

Even before that. Step back to
1920-1921… If you look at the statistics during that period of time when we
were on an actual gold standard, you saw a huge contraction of GDP and in the
price of goods. Here are the actual numbers: between the summer of 1920 and
1921, nominal GDP fell by 23.9%; wholesale prices as measured by the PPI
dropped by 40.8%; and the CPI fell by 8.3%. It lasted for roughly two years.

He makes a key point: even under a gold standard in the
1930s, once Roosevelt confiscated and revalued the dollar to gold, inflation
again was the result:

Furthermore, even in the gold
standard we had during the '20s and '30s, we had inflation. President Roosevelt
devalued the dollar by 60% in March of 1933, and when he repriced gold from $20
to $35, he stopped deflation dead in its tracks. By the end of the month we
were experiencing inflation. We were running single-digit inflation rates the
very month he did that in 1933, all the way up to 1937, when FDR and the
Federal Reserve reversed course. So as a result of the devaluation we got large
doses of inflation.

I have long held that as long as inflation is measured in
prices – a measurement that government will always manipulate lower than
reality – central banks will be free to implement policies that support
monetary inflation. And it is in monetary inflation where the big theft takes
place. Prices are a sideshow meant to
distract the audience from the actual theft.

In the era of modern central
banking, there is only inflation. One cannot even credibly use Japan as a
proxy. Check the numbers; they have had some minor pluses and minuses -- but
nothing coming close to wholesale deflation of prices. Plus or minus two
percent per year is within error -- given the manipulation and randomness of
the statistics used.

Central banks want inflation. This
has proven difficult to achieve lately, however do not discount for a minute
the desire to get it. There are still many tools available for banks and
governments to get this wish. As long as we do not have price inflation in the
standard government statistics, they will feel free to keep pumping. So they
will keep pumping until they get price inflation. Any shrinking in credit
markets only gives room to pump further.

The FED’s balance sheet tripled
during the crisis of 2008/2009. Who says they will not keep tripling it until
price inflation gets in the way? There is no argument one can make for the FED
to not buy junk debt from the banks at face value in order to save the
banks…until we get to price inflation or mass inflation. Nothing has stopped
them from buying a lot of junk so far.

As long as [the Fed’s] yardstick is
inflation as measured by the CPI, they will be under no constraints to continue
pumping until they get serious inflation as measured by the CPI.

Jim Puplava, welcome to my world.The deflationists of the world have no chance
with central bankers in charge.

As long as it is commonly accepted wisdom to measure
inflation / deflation in terms of a basket of consumer prices – with the measurement
controlled and manipulated by the government – and the prices as measured are
not increasing at significant (low double-digit perhaps?) rates, there will be
no deflation: not in prices and not in money supply.

There are many issues to draw our concern in the current
economy; deflation is not one of the issues.

Saturday, July 28, 2012

At The Daily Bell today, Anthony Wile wrote an editorial
entitled “Auditing the Fed Is a Sideshow: Who Audits the Auditors?”

An audit of the Federal Reserve
would be nice but really it wouldn't change anything. In fact, it would likely
prove a kind of sideshow from reality, which is that monopoly central banking
should simply be abolished.

Now this is true enough.The central bank will not be abolished solely due to an audit.

And that probably won't happen
until people get so sick and tired of being driven into bankruptcy and despair
that they begin to kick the doors down and arrest the criminals cowering
inside.

This is also true enough.

I have read through the column a few times.Other than attributing the bill to Dr. Paul, I
find not one mention of the work Ron Paul has done to bring the country and
Congress to this point.If Anthony views
this as a sideshow why doesn’t he state plainly that Ron Paul’s efforts have
been a waste of time –in fact, a distraction?

Conversely, while it can be concluded that an audit would be
a sideshow, if not a sham, is it not worthwhile to recognize the efforts of Ron
Paul in being the single most important educator of the public on this general
subject – that being the corruption of the current central banking system?

Anthony does neither – instead, ignoring the both the presence
of Ron Paul and the successes he has had in education and exposure throughout
this entire narrative.

Given the respect Anthony has shown Dr. Paul in the past, it
is confusing why he has chosen this path.It could have been possible to make the point that the audit is a
distraction, or perhaps a very minor step towards the ultimate objective, while
appreciating the almost single-handed efforts of Dr. Paul in bringing the
Federal Reserve into the public dialogue.

It's not as if people don't already
know the depths of the depravity that is the modern money system.

But most people DON’T know the depths of the depravity that
is the modern money system.This is a
very ignorant statement on Anthony’s part.Didn’t he see the targets of the 99%?Were they after the Fed?Were they
after the true one-tenth of one percent?How does Anthony believe the people will ever become knowledgeable
enough “to kick the doors down and arrest the criminals cowering inside”
without some education beforehand?

The reason to audit the Fed is to
find out what "they" are up to. But we already know that.

Anthony already knows this.More and more people already know this. But most people don’t know this.
There is one primary reason more people know this today than did five years ago
– Ron Paul.

I have commented several times regarding my admiration for
the work Anthony has done with The Daily Bell, despite some significant
disagreements I have had with certain issues at the site.However, this is a very disturbing
editorial.I have seen directly The
Daily Bell handle with kid gloves individuals with positions 180 degrees
counter to everything The Daily Bell writes about – letting personal and
business relationships stand in the way of editorial content.Yet here, Anthony writes an editorial throwing
Ron Paul under the bus – a man who has done more toward educating for freedom
and liberty than any one individual has in 200 years.

Ron Paul has earned enough goodwill to last a dozen
lifetimes.Anthony Wile, not so
much.

I have written fairly extensively regarding US policy up to
and during World War II.These writings
include reviews of books regarding Pearl Harbor, the decision to use the atomic
bomb, and most thoroughly several posts regarding Herbert Hoover’s book, Freedom
Betrayed.

I am currently reading further on the subject, and expect to
write more on this as well.However, two
views come to mind:

1)I have commented before, yet my feeling only
grows the more I read, that the objective of the United States Government in
entering the Second World War was to ensure victory for Communism and Communist
Russia.By doing so, an enemy – both militarily
capable and ideologically incompatible – would be available to ensure further aggrandizement
of the state over an indefinite period of time (as the communists fell, a role
now played by the war on terror).

2)It was necessary that the United States enter
the wars of the first half of the 20th century and assume this
position of global power in order that the elites who sit above national
politics had a continuing vehicle through which to lever control.Great Britain in many ways historically served
this purpose, but was by this time almost bled dry – and in any case could
never offer the possibilities of wealth confiscation and international control
that the United States could offer(how much lessor if Lincoln had lost the war).The people of the United States had strong
feelings of leaving Europe’s wars to Europe. This feeling was eroded over time, and came
crashing down on December 7.

There is a danger that these views will cloud my further
readings on this subject – that I will look only for confirmatory statements.This is a risk – yet I am finding no other
way to explain rationally the actions of both the United States and British
governments.

We have seen that the market is the
pivot around which the whole of economic life revolves.We can say just as well that the market
revolves around the entrepreneur.

Ballvé offers a simple definition for entrepreneur:

Strictly speaking, the entrepreneur
is anyone who goes to the market to sell or anyone who goes to the market to
buy, not for his own consumption, but to resell what he has bought….The
entrepreneur aims at making a profit….

This buying and onward selling function can take many forms –
for example: buying a good in one location with an eye toward selling the same
good in a different location; buying a good and improving it before resale;
buying a good and holding it until more favorable market conditions emerge.

In a statement worthy of Ayn Rand, Ballvé sees the entrepreneur
as a hero:

Production, around which all
economic life revolves, is, then, the great adventure of mankind: it is the
struggle with tomorrow, the struggle with the unknown.The champion, the hero, and frequently the
victim in this struggle is the entrepreneur.He undertakes some enterprise in quest of profit.But in order to obtain it, he is obligated to
satisfy the consumer…the consumer never loses.The entrepreneur, on the other hand, can see all his hopes of profits
transformed into a loss he alone must bear: the profit that the consumers (the
general public) made is theirs to keep, while the entrepreneur is ruined.

A trade requires two participants – often referred to as a
buyer and a seller (but in reality both are at the same time buying and selling).In the free market, a trade results in two
winners, as each participant prefers what he is buying to what he is selling.I want the candy bar while the shopkeeper
wants my dollar – after the transaction, each of us feels wealthier…else we
would not have traded!

For the consumer, the trade ends in a win and his
satisfaction is therefore assured: he has eaten the candy bar at a price he
deemed appropriate.However, for the
shopkeeper – while the single trade was certainly beneficial – he must
continually asses market conditions and make proper estimations regarding all
factors of the business.If he fails at
this, he will eventually lose.However,
each and every one of the consumers of candy bars remains, as he was at the
time of the trade, a winner.Thus, Ballvé
rightly points out that the profit made by the consumer is his to keep, while
the entrepreneur alone bears the risk of miscalculation.

The entrepreneur must make many calculations when planning
and executing his business.What are
costs today and what will be costs in the future as I produce?What is the demand for the goods today and in
the future?How will this demand affect
pricing?Where is the competition and
what actions are they taking or might they take in response to my efforts?How much capital is necessary in the
fulfillment of the business plan?All of
the calculations are calculations of probabilities – none of them can be exact
because all of them regard expectations of conditions in the future.

In the meantime, countless numbers of consumers have had
wants and needs satisfied.For the entrepreneur,
the calculations continue.For him, his
reward is profit if he properly calculates and loss if he does not.

What a harrowed existence!Ballvé asks if all of this can be avoided by political means.He suggests that he will answer this more
fully in subsequent chapters, however here he makes a very simple yet profound
statement on the matter:

We shall concern ourselves later
with the proposals that have been advanced and even tried with this object [of
somehow using political means to avoid or minimize these risks] in view,
whether by way of a change in the whole economic system or by way of corrective
measures designed to overcome the alleged “weaknesses of free enterprise.”But here we can already anticipate this much:
What the entrepreneur cannot foresee, nobody can foresee, because, as we have
said, science is impotent in the face of the unknown.

No one can know more than the entrepreneur.No one else is risking his capital or the
capital specifically entrusted to him.No
other means can be devised to bring to market the items most desired by
consumers – that is to say, the general public.

There is no scientific formula for profits that is available
to someone else not the entrepreneur- such a formula is not even available to
the entrepreneur!He is making a guess –
hopefully a well-educated one, but a guess nonetheless; a guess based on probabilities.

Can the state make a better guess? Actors not in the market,
not investing their own capital or capital voluntarily given for
investment?Regulators?

The free market is a market where consumers – the general
public – rule.It is a market where entrepreneurs
take the risks.The consumers always end
up as winners in the trade; the entrepreneurs win only if they make good
calculations of probabilities.

Instead of the free market, where the general public is the
object to be served, much of the world is offered a political market.In this market, it is the producer that is
supported – supported by various means of regulation and restriction of
competition.Supported by subsidies designed
to prevent loss or minimize the negative impact of poor calculation.

Every one of these regulations and subsidies serves to
diminish the role of the consumer.Yet it
is the consumer that ultimately is the best regulator of the market.The consumer decides which producers are
properly satisfying wants and needs.The
best form of democracy is the democracy brought on by the wallet of the
consumer acting in a free market.

In less than ten pages, Ballvé makes plain the most simple
and important of truths: leave the market free and the general public will find
the greatest amount of its wants and needs fulfilled.

And the cornerstone and hero of this simple truth is the entrepreneur.

Wednesday, July 25, 2012

I am reading through a delightful book written by Faustino
Ballvé, entitled “Essentials of Economics: A Brief Survey of Principles and
Policies.”

Following is taken from Chapter 2: The Market.From this chapter, I will focus on the
comments made by Ballvé regarding value.

Value always expresses a judgment
of the estimation in which something is held, because a thing has value if and
only in so far as it is wanted or desired.For example, a millionaire can buy a diamond for a hundred thousand
dollars and find himself dying of thirst in the desert and unable to obtain
even a glass of water in exchange for his diamond, which there lacks all value.

I like this guy Ballvé.He makes a great point, one that I tried to make (with less success) during
one of my many conversations at the Daily Bell:

But you try an experiment. Go out
in the desert for two years. You will see no other human being, and have no
chance for rescue. You can take either a water truck or a London good bar of
gold.

Which do you choose? Do you do so
intrinsically or subjectively?

He addresses those who attempt “to
find in labor a measure of the value of things.” He outlines the fallacy of
this – both in terms of the so-called value to produce as well as the so-called
value of labor saved by the product.He
asks “…who is to fix…” this value of labor?Is it the government?

He points to supply and demand in a free market as that which
determines the value of any good – value as expressed in terms of another,
neutral commodity: money.It is value
derived by market means – prices developed based on supply and demand, with
competition between suppliers on the one hand and competition between consumers
on the other – that is the key; and such competition is the means by which the
consumer (meaning each and every individual) is sovereign.

And as the consumer is the public
in general, without distinction of rank or fortune, the free market is the most
obvious expression of the sovereignty of the people and the best guarantee of
democracy.

It is interesting that Ballvé identifies this process as the
best guarantee of democracy.Each individual
gets to freely vote with his pocketbook.What is interesting is that in today’s world a defining feature of
so-called free-market democracies is the installation of a central bank – an institution
designed to use government-enabled monopoly power (there is no other type of
monopoly power) to centrally plan the single most important commodity to the
free market: the commodity of money.

When governments intervene in the process of free-market price
discovery, Ballvé writes that the individual falls from the status of being a
sovereign to that of being a slave.

Control of the market by
governmental authorities is the instrument of modern dictatorships, much less
cruel in appearance, much less spectacular, but far more effective than the
police or naked force.

Ballvé concludes with some very insightful and meaningful
points:

Nothing has value in itself.The consumer confers value on it by seeking
to acquire it.Hence the value of a
thing is never objective but always subjective.

The consumer confers the value – not the producer, not the
cost to produce, not the labor stored in the good.Only the consumer.

Many seemingly otherwise in the free-market world describe
gold as having intrinsic value.It does not
and cannot.Dr. Gary North wrote a
wonderful piece describing this:

Gold has intrinsic properties that
make it valuable. However, it does not have intrinsic value.

I mention this, because, at some
point, you will read about gold as a store of value. You will read of gold's
intrinsic value. Every time you read either of these phrases, you will know
that the author does not understand economic theory.

There is a widespread mistake in
economic analysis within those circles that are called the hard-money camp.
People are under the impression that gold is a standard of economic value. This
concept is foreign to economic theory.

Yes, we speak this way. The Bible
says that a virtuous woman is worth more than rubies (Proverbs 31:10). But it
does not say exactly how much more valuable than rubies she is. It does not
offer a formula. There is no good virtuous-woman-to-rubies ratio that is
normal. The price of a virtuous woman on a free market does not fluctuate
around this ratio.

We read that the price of gold has
not changed. Only the price of the dollar has changed. Again, this is obvious
nonsense. The price of gold went over $1,000 in March 2008, only to fall to
about $750 five months later. Yet consumer prices did not change.

The lesson here ought to be that
gold is not a measure of value. Then what is? Nothing is, any more than there
is a measure for the value of a virtuous woman.

Individuals impute value. They
think something is valuable to them at this moment. This can change, moment to
moment. People are constantly changing their assessments of what items or
services are worth to them.

Back to Ballvé:

It is an error to believe that he
who buys a thing wishes to give for it an equivalent value or that he who pays
two hundred dollars for a cow thinks that a cow has the same value as two
hundred dollars, or vice versa.In the
market the buyer as well as the seller gives less than he gets….If this were not so, no exchange would take
place: each one of them would keep what he already has.

This is quite simple and yet not recognized by many.I want a candy bar.The store owner wants my dollar.After the exchange, we are both richer – a win-win
proposition!It is only when one of us
is forced into the trade that the net effect is a zero-sum game – a win-lose if
you will.

Economic dictatorship arises when
production and trade are withdrawn from the mechanism of the market by the
action of the governmental authorities.

First and foremost, this dictatorship is applied through
control of money – the single most important commodity in the market, virtually
always one side of every trade in an advanced economy.More so, the dictatorship is revealed through
various regulations, rules, and laws that hamper the otherwise free,
non-coercive exchange of goods.

The Daily Bell always argued that every regulation and law
was a price fix.This is quite true, as
every regulation and law in some way hampers the buying and selling of goods
that would otherwise be demanded and produced in a free market.With this “hampering” comes changes and
distortions in prices.

Much of the world economy is blanketed by central banking
and regulation, resulting in price fixing by non-market actors.As outlined by Ballvé, these are the characteristics
of an economic dictatorship.

However, to return to the main theme of this chapter: all
value is subjective.There is no good
that holds a constant value.In each
good, two individuals will see different value; the same individual will see
two different values on two different occasions.What is valuable to life near a river might
be worthless to life in the desert.

Even money, the commodity most universally in demand, does
not hold constant value.This most certainly
holds true for gold: the commodity that, when left free, has most often served in
the function of money in a division of labor society.

All value is subjective.Fully understanding and applying this principle allows sovereign power
to each individual.That governments
have worked tirelessly to hide and ignore this principle suggests the desires
for dictatorship of those in power – a dictatorship that, according to Ballvé,
is “far more effective than the police or naked force.”

It is truly more effective, because it leaves most of its
victims believing that they are living in freedom, while all the time they are
serving their masters.